Emergency fund creates sense of peace

I’m following your plan, and currently I have $14,000 in my emergency fund. What are essentials for three to six months of expenses?

– Brian

Dear Brian,

Basically, you should ask yourself this question: What would it take to operate my household for a month? There are several different things that could be classified as “essentials,” but if you take those things and multiply the number by three, four, five or six, you’ll see how much money you need to have a fully loaded emergency fund of three to six months of expenses. This is Baby Step 3 in my plan.

Some people get really technical about exactly how many months of expenses they need to save in this range. And that’s OK. You can take a little time to evaluate things before moving on to Baby Step 4, which is investing 15 percent of your household income into Roth IRAs and other pre-tax retirement plans.

Believe me, it’s a great feeling to have a big pile of cash sitting there just for a rainy day. You don’t want to go nuts and make it so big that you sacrifice retirement or other important aspects of your life, but after a point you shouldn’t be too concerned whether you have three months or six months of expenses – or somewhere in between – saved just for emergencies.

Having a nice emergency fund, along with no debt, creates a wonderful sense of financial peace!

– Dave

Dear Dave,

If a wife takes out a credit card in her husband’s name without his knowledge, and they get divorced, can the husband claim identity theft?

– Nancy

Dear Nancy,

Absolutely! Unless they have power of attorney, anytime someone opens an account in a name other than their own, they have stolen an identity. Being married to someone doesn’t give you the right to sign their name to a document.

You cannot legally sign your spouse’s name without first having power of attorney privileges. If you do, it’s called identity theft. It’s a crime anytime you lie to get money.

– Dave

Dear Dave,

My daughter has the opportunity to take a trip with her eighth-grade class. The cost is $650. Do you think she should have to contribute to the cost of the trip, or should I cover it all?

– Colleen

Dear Colleen,

This is a really good question. When it came to making these kinds of decisions at our house, we’d take a look at whether the kid was behaving, getting good grades and stuff like that. It can be a challenge at that age, I know. But if they were living like responsible young people, we would pay for this sort of thing as a reward.

Still, at that age a kid should definitely have some skin in game. If you can pay for this without breaking the bank, and she’s fulfilling her responsibilities as a good kid, it would be a good idea to make her come up with her own spending money for the trip. You don’t want her to grow a sense of entitlement, and doing this would force her to work and save a little bit to make this thing happen!

– Dave

• Dave Ramsey is America’s trusted voice on money and business. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.